• 20-20 Insights

Fixing the Home Financing Market: HARP 2.0 Analysis, Observations and Comparisons

Executive Summary program has had on the housing market. Per initial estimates, HARP 2.0 has the potential to The U.S. housing market has been on a decline add $350 billion to the mortgage originations for the past five years, and the resulting financial market over the next two years, thus providing crisis has engulfed the entire global economy. To refinance relief to about two million borrowers. tackle the vicious circle of falling home prices and foreclosures, the U.S. government launched While HARP 2.0 does not address distressed various programs aimed at reducing mortgage borrowers (who are addressed by other programs) defaults through a reduction of payments and and shadow inventory segments, nevertheless it short sale. While the low interest rate regime and is focused on market shortcomings that previous the correspondingly low mortgage rates make programs were unable to solve. This paper it more conducive for homeowners to refinance addresses the attributes and implementation of their mortgages, steadily declining home values HARP 2.0. have made most borrowers ineligible for such programs. The Home Affordable Refinance Background Program (HARP) 1.0, launched in 2009, did cater The U.S. Housing Market Decline to underwater homeowners, but not to a signifi- The U.S. housing market started off the millennium cant extent (e.g., loan-to-value ratios were limited strongly, buoyed in particular by the low interest to 125%). Additionally, high refinance charges, rate regime set by the U.S. Federal Reserve (the and low lender and insurer participation, reduced Fed) to boost the economy after the bursting of the potential relief HARP 1.0 could offer. the dot-com bubble. New home sales increased In November 2011, a revamped version of HARP, at an annual rate of 6.43% over the period 2000 HARP 2.0, was launched. HARP 2.0 caters to signif- to 2005 (see Appendix, Figure A2). Construction icantly underwater homeowners. It features lower activity followed step, with new for-sale homes refinance charges, greater government support rising at an annual rate of 7.46% during the same for lenders, minimal appraisal and underwriting period (see Appendix, Figure A3). Along with requirements, and a simpler and faster process. low interest rates (and the corresponding low The combination of these HARP 2.0 features, mortgage rates), the housing tax policy (capital low target interest rates, signs of stability in the gains exclusion of $250,000/$500,000 for indi- housing market and other supporting initiatives viduals/couples once in two years on the sale of such as an extension of payroll tax cuts could a home) and deregulation in financial markets turn out to have the biggest impact a government (allowing investment and commercial banks to

cognizant 20-20 insights | february 2012 merge, use of adjustable rate mortgages, lower absolute numbers as well as in comparison to the control on interest rates set by banks, etc.) fueled total refinance volume. investments in the real estate and mortgage markets. According to the latest estimates by CoreLogic, there are still about 10.7 million underwater However, the interest rates were kept low for a mortgages and an additional 2.4 million mortgage prolonged time. Low interest rates, high home borrowers have less than 5% equity in their prices, and “flipping” (reselling homes to make homes. Negative/close to negative equity has led a profit) effectively created an almost risk-free to a situation in which HARP 1.0 environment for lenders because risky or is being rendered less effective Negative/close to defaulted loans could be paid back by flipping due to risk avoidance from negative equity has homes. Lenders began financing subprime and mortgage insurers, second lien no-doc (no income verification) mortgages. By holders and originators. These led to a situation 2006, the mortgage rates rose to 6.66% from a risk avoidance aspects include in which HARP 1.0 low of 4.65% in 2003 (see Appendix, Figure A1). second lien holders not agreeing is being rendered This decreased housing demand and increased to re-subordinate behind a new the monthly payments for adjustable rate mortgage, insurers not agreeing less effective due to mortgages. The resulting foreclosures increased to transfer the private mortgage risk avoidance from supply, further lowering housing prices. With insurance (PMI) policies to new mortgage insurers, increasing defaults, the securitization market mortgages and lenders imposing backed by these mortgages collapsed, which led overlays on government eligibil- second lien holders to the financial crisis in 2007. The housing market ity guidelines. and originators. has been in decline ever since. The Federal Housing Finance Agency (FHFA) Government Programs to Stabilize recently launched a revamped version of the the Housing Market HARP program, dubbed HARP 2.0, which widens the net to include refinancing to accommodate To help homeowners avoid foreclosure and meet more insufficient and negative equity borrowers their mortgage obligations, and to stabilize the and thereby hopes to improve refinance volumes. housing market, the U.S. government introduced numerous programs beginning with the Housing HARP 2.0: Program Details and Economic Recovery Act (HERA) of 2008’s and Analysis HOPE for Homeowners. Figure 1 (next page) HARP 2.0 was launched by FHFA on November 15, summarizes these programs along with their 2011 to boost refinance volumes and enable more effectiveness in stemming the decline in the U.S. homeowners, even those who are significantly housing market. underwater (LTV>125%), to benefit from persis- From the summary in Figure 1 it is apparent tently low interest rates. that various government programs have had Key Features limited success in reducing loan defaults and The key features of HARP 2.0 are highlighted foreclosures, and have been unable to address in Figure 3 (see page 5). The key changes in all distressed homeowners. Further, none of the the program are removal of underwater limits, programs evaluated in the chart target severely simplified appraisal and underwriting norms, as distressed borrowers. well as reduced guarantee fees — which will make With the prevailing low interest rates, refinance is more homeowners eligible for refinance under perceived as one of the primary ways of reviving HARP. the housing markets. Figure 2 (see page 4) Guidelines tracks HARP refinance volumes and compares The HARP 2.0 guidelines are detailed in Figure 4 it to the total refinance volumes observed since (see page 6). the program’s inception. The refinance volumes under HARP have been dismal, with only about HARP 2.0 is Beneficial for Borrowers, one-quarter of the initial target of three million Servicers, Lenders and Investors to four million refinances achieved as of October HARP 2.0 fills a crucial gap (targeting severely 2011. After a promising start, HARP refinance underwater borrowers), and has the potential to volumes have been on the decline of late, in benefit borrowers, lenders and investors alike.

cognizant 20-20 insights 2 Government Support Programs

Program and Salient Features Performance Assessment Duration

Premise: Write down of principal balance to 93% of current home value As of February 2009, only The program failed because of and reduction of the mortgage payments thereby. 451 applications had been high fees, high interest rates, the Target segment: Struggling and upside-down borrowers who had received and 25 loans need for a reduction in principal HOPE for mortgage payments worth more than 31% of the gross monthly income, finalized, far short of the on the part of the lender, and and were facing possible foreclosure. expected figure of 400,000. the requirement that the federal Homeowners government receive 50% of Eligibility criteria: July 2008 to any appreciation in value of the • The original mortgage is dated on or before January 1, 2008. house. September • The homeowner did not default on the original loan intentionally. 2011 • The homeowner is not invested in multiple home loans. • All information on the original mortgage is true (including income sources and job details). • The homeowner has not been convicted of fraud.

Premise: Reduction in mortgage payments through a combination of As of October 2011, the HAMP was a big disappointment rate reduction, term extension and principal forbearance such that following statistics were because of servicers’ inefficien- debt-to-income ratio (DTI) is reduced to 31%. reported: cies in offering HAMP and the Target segment: Borrowers who are facing financial hardship and are • Trial modification offers re-default by many borrowers Home delinquent or in danger of becoming delinquent. (cumulative): 1.95 million. who were issued HAMP modifica- tions. With the program due Affordable Eligibility criteria: • Active trial modifications: to expire by December 2012, • Owner occupied and mortgage obtained on or before January 1, 2009. Modification 85,060. only 735,464 homeowners are Program • The homeowner has a mortgage payment that is more than 31% of • Permanent modifications currently in permanent modifica- his/her monthly gross (pre-tax) income. (HAMP) started: 883,076. tions and 85,060 are under trial • Up to $729,750 is owed on the home. • Active permanent modifi- modifications. These numbers March 2009 • The homeowner has a financial hardship and is either delinquent or in cations: 735,464. are well short of initial promises to December danger of falling behind. to lower mortgage payments for 2012 • The homeowner has sufficient, documented income to support the 3 million to 4 million borrowers. modified payment. This program too did not offer • Homeowner must not have been convicted within the last 10 years incentives to significantly help of felony larceny, theft, fraud or forgery, money laundering or tax underwater borrowers. evasion, in connection with a mortgage or real estate transaction.

Premise: Reduction in mortgage payments through refinance to lower and Freddie Mac The refinanced loans are much interest rates. refinanced nearly 962,100 lower than the estimated figure Target segment: Borrowers current on mortgages but with fallen home loans through HARP program of 3 million to 4 million. values (LTVs from 80% to 125%). as of October 2011. Lender conservativeness and lack Home Eligibility criteria: of appropriate incentives and Affordable • Mortgage must be owned or guaranteed by Fannie Mae or Freddie provisions led to limited success Refinance Mac (no FHA, VA, USDA or jumbo loans permitted). of this program. Program • Borrower must be current and have not been more than 30 days late on a mortgage payment in the last 12 months. (HARP) 1.0 • The loan-to-value (LTV) ratio on the first mortgage can’t exceed 105% March 2009 to (raised to 125% on July 1, 2009). June 2012 • Borrower must exhibit the ability to make the new payments which must also improve the long-term outlook of the mortgage. • No limit on the combined loan-to-value (CLTV) ratio for second mortgages as long as the second mortgage lender is willing to re- subordinate its loan to the new first mortgage.

Premise: Foreclosure avoidance through short sale or deed-in-lieu. • All HAFA Agreements Limited success as HAFA was Home Target Segment: Borrowers who are underwater on their mortgages Started: 34,605. not able to address problems and have been denied a modification via HAMP. • HAFA Agreements Active: of borrowers residing in owner Affordable occupied properties. Eligibility criteria: 8,818. Foreclosure • Borrower lives in the home or has lived there within the last 12 months. • HAFA Transactions Alternatives • Borrower has a documented financial hardship. Completed: 20,701. (HAFA) • Borrower has not purchased a new house within the last 12 months. • Completed Transactions — April 2010 • The first mortgage is less than $729,750. Short Sale: 20,110. • Completed Transactions — to December • The mortgage was obtained on or before January 1, 2009. • Borrower must not have been convicted within the last 10 years of Deed-in-Lieu: 591. 2012 felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.

Figure 1

cognizant 20-20 insights 3 HARP Performance

60,000 18% 16% 50,000 14% 40,000 12% 10% 30,000 8% 20,000 6% 4% 10,000

Number of Transaction s 2% 0 0% Jun ‘08 Dec ‘08 Jul ‘09 Jan ‘10 Aug ‘10 Feb ‘11 Sep‘11 Apr ‘12

HARP Refinance Volume Percent Share of HARP in Total Refinance Volume

Source: FHFA — Foreclosure Prevention & Refinance Reports Figure 2

With the revised guidelines, HARP is now more and disparate technology and processes. Luckily inclusive for underwater borrowers. As compared for originators, the technology alignment on the to HARP 1.0, HARP 2.0 does not have any originations side is light years ahead of servicing. underwater limits. This means that borrowers with Most of the HARP changes will be easily accom- more than 125% LTV, disadvantaged so far, can modated through product and pricing changes benefit from this program. and some alterations to core originations HARP 2.0 fills a Also, vacation homes and systems. crucial gap (targeting investment properties, now included in the purview, Lenders can realize significant benefits by offering severely underwater will add to the refinance this program. Freddie Mac and Fannie Mae have borrowers), and has volumes. The revised extended greater support to this program by waiving the reps and warranties requirements the potential to benefit payment history guideline, allowing at the most one imposed on lenders. The losses on any bad loans borrowers, lenders and late payment in the last made under HARP 2.0 will be borne by Freddie investors alike. seven to 12 months, would and Fannie. According to CoreLogic, with nearly also increase the number of two million homeowners expected to qualify for homeowners eligible for HARP and will further HARP 2.0, the program will create an additional incentivize borrowers to stay/become current on $350 billion in the originations market over the their mortgages. HARP 2.0 waives the need for next two years ($175,000 average loan amount). appraisal and underwriting for many homeowners, Lenders who show greater flexibility and quick partly enabled through the proposed use of rollout of HARP 2.0 stand to gain from this. automated valuation models (AVMs). The potential originations market will also help banks use their excess capacity, which had been For lenders, implementing HARP 2.0 will require held back due to the depressed housing and job few changes to existing loan origination and market, a lower willingness to take lending risks fulfillment systems and processes, more so for and hence reduced refinance volumes. With the lenders who have already implemented HARP 1.0. backing of government-sponsored enterprises Thus, the refinance process will now be simpler, (GSEs), lenders and servicers can use HARP 2.0 faster and easier to implement for lenders, to lower monthly borrower payments and thereby which can lead to a rapid growth in refinance avoid potential defaults, thus improving their loan volumes. This is unlike HAMP implementa- portfolio quality. Greater lender participation will tion for mortgage servicing, which has been a help the broader economy and stem any further nightmare for most servicers due to antiquated declines in home prices.

cognizant 20-20 insights 4 HARP 2.0 Features

• Expected to benefit two million additional home owners. • Refinancing for homes that are underwater and can’t obtain a traditional refinance or are Scale and Scope ineligible under HARP 1.0. • Only homes with loans guaranteed by Fannie Mae or Freddie Mac before May 31, 2009 are eligible.

• Federal Housing Finance Agency (FHFA), which released the HARP 2.0 program and oversees Fannie Mae and Freddie Mac. Participating • Fannie Mae and Freddie Mac — the GSEs. Entities • Bank of America, , Chase, US Bank and Citi may be some of the participating lenders; lender participation is voluntary.

• The program guidelines were released to lenders on November 15, 2011. Timelines • HARP 2.0 refinancing applications are being accepted beginning December 1, 2011. • Deadline for application for a refinance under HARP extended to December 31, 2013.

• Mortgage must be owned or guaranteed by either Freddie Mac or Fannie Mae. • Current mortgage must have been closed on or before May 31, 2009. • Should not have completed a HARP refinance since June 1, 2009. Eligibility • Must be current on the home loan. Requirements • Cannot have made a late payment within the past six months and more than one late payment in the last 7 to 12 months. • Loan-to-value ratio must be greater than 80%. • Loan must fall under the current conforming loan limits.

• No underwater limits: Borrowers will now be able to refinance regardless of how far their homes have fallen in value. Previous loan-to-value limits were set at 125%. • Eliminating appraisals and underwriting: Most homeowners will not have to get an appraisal Key Changes or have their loan underwritten, making their refinance process smoother and faster. from HARP 1.0 • Modified fees: Certain risk-based fees for borrowers who refi into shorter-term loans have either been eliminated or modified. • Relaxation of guidelines relating to reps and warranties and being current on home loan.

Note: A conforming loan is one that falls at or below the maximum financeable amount allowed by the FHFA. In general, the maximum amount financed is $417,000. However, in high-cost areas defined by the FHFA, the maximum amount is $625,500. Figure 3

The waiver of mortgage insurance (MI) for economic growth. This will help keep mortgage those mortgages which do not have an MI will rates down and enable borrowing/refinancing at be beneficial for homeowners who have seen a lower rates, thus supporting the housing market significant increase in their LTVs. A homeowner revival. now also has multiple refinance options to select from, provided that he/she qualifies for the same. Consumer spending is one of the most signifi- Risk-based fees (or loan-level price adjustments) cant drivers of the U.S. economy, accounting for for homeowners who refinance into shorter-term nearly 70% of the gross domestic product (GDP). loans have either been eliminated or modified, Given the poor job market and the slow GDP and this encourages homeowners to opt for lower growth forecast, the recent legislation to extend term fixed-rate mortgages so they can more payroll tax cuts by two months (and maybe more quickly build equity in their homes. These aspects, in the coming months) allows consumers greater along with simpler and faster processing, make spending flexibility and aims to boost the GDP. HARP 2.0 much more attractive to homeowners This can have a positive impact on the housing looking to refinance. market as well, with more homeowner savings available to pay their mortgages. Government Policies and Economy Are Conducive for HARP 2.0 Meanwhile, the U.S. housing market is showing some signs of stability. As seen in Appendix, The U.S. government aims to keep interest rates Figure A6, the House Price Index (HPI) from near zero at least until mid-2013 and may extend March to October 2011 has remained more or this policy further if deemed necessary to support

cognizant 20-20 insights 5 HARP 2.0 Guidelines

Guideline Details

Most loans owned by Fannie Mae and Freddie Mac will be eligible for a HARP 2.0 refinance. Loans Loans Covered that are not subprime and those that allow negative amortization, such as Option ARMS.

The program is for the first lien only. All subordinate/junior liens must be re-subordinated Liens Covered to the new first mortgage.

All caps on LTV for HARP refinance eligibility have been removed. Some limits come into play based on whether the borrower refinances under HARP with the new loan being an FRM or an ARM. The guidelines are stated below: LTV Guidelines • No maximum LTV for FRMs with terms up to 30 years. • 105% for FRMs with terms greater than 30 years and up to 40 years. • 105% LTV for ARMs with initial fixed periods greater than or equal to five years and terms up to 40 years (as permitted by the ARM plan) or ARMs with terms longer than 30 years.

• If the current loan has mortgage insurance, mortgage insurance will also be required on the Mortgage Insurance new mortgage. Otherwise, it won’t be required. • Loans that currently have lender-paid mortgage insurance (LPMI) are ineligible.

• No income and asset documentation will be needed in most cases. This could change by lender based on their overlays. Documentary • But if the payment increases by more than 20% or funds must be brought in to the closing for Requirements some reason or another, borrower must re-qualify for the new loan under the following rules: Borrower must have a credit score of at least 620 and debt-to-income ratio cannot exceed 45%. Also, lenders are required to verify income and assets.

Loan Level Price The fees are 0% on FRMs of 20 years or fewer, and 0.75% for FRMs of more than 20 years Adjustment (LLPA) and for all ARMs. Guidelines

Coverage for Second/ Second/vacation homes and investment/rental properties are eligible for HARP 2.0 provided Investment Homes that they meet the eligibility guidelines.

• HARP 2.0 is shifting responsibility for certain “reps and warranties” — defined as lender obliga- tions when a loan goes bad— from the banks to the government. With less liability for Reps and Warranties the “bad loans” they make, a greater number of banks are expected to participate in HARP. • The relief on reps and warranties is backed in part by use of AVMs (Automated Valuation Models) by Freddie and Fannie (Fannie’s AVM system won’t be ready until March 2012).

• The waiting period to refinance after a bankruptcy and for reestablishment of credit has been lifted. Others • The borrower must receive a benefit in the form of either a reduced monthly mortgage payment or a more stable loan product, such as refinancing an ARM into an FRM.

Figure 4 less stable. Hence, this may be the right time for three months ending last October. With nearly borrowers to refinance without worrying about a 10.7 million homeowners still under water, and a significant future reduction in their home values. slow housing market recovery, refinance activity has strong growth potential. The Scope and Capacity for Refinance Remains Huge Issues and Challenges Can Impede Traditional refinance has seen low activity in the HARP 2.0’s Success last few years due to historically low mortgage HARP 2.0 refinancing will not significantly reduce rates (see Appendix, Figure A1) and the risk-aver- the level of insufficient and negative equity. This sion of lenders in an uncertain economic environ- is because the program offers only the potential ment. This has led to a surplus capacity with the of lower payments but doesn’t reduce principal, banks, which can now be put to use on the back of so borrowers will continue to hold mortgages greater government support. that are significantly higher than the values of their homes. HARP 2.0 is specifically targeted As seen in Figure 5, refinance activity has been at severely underwater borrowers and does falling, with a year-on-year decline of 29% as of not address the larger issues of high home October 2011. However, the pace picked up in the inventories and depressed home prices.

cognizant 20-20 insights 6 Total Refinance Volume

800,000

600,000

400,000

200,000

0 Jun ‘08 Dec ‘08 Jul ‘09 Jan ‘10 Aug ‘10 Feb ‘11 Sep‘11 Apr ‘12

Source: FHFA — Foreclosure Prevention & Refinance Reports Figure 5

Loans with lender-paid mortgage insurance analysis it has the potential to be more successful (LPMI) are not eligible for HARP 2.0. Addition- compared to HARP 1.0, and therefore could lead ally, though HARP 2.0 allows refinance for LTV to large refinance volumes. In our view, lenders ratios more than 125%, the criteria for being and servicers and underwater homeowners current on payments will not cover the hardest stand to benefit from this program and hence hit homeowners (those who have defaulted on should grab this opportunity. By reducing the more than one payment in the last year) unless monthly payments for underwater homeowners they improve their payment history in the coming and building equity faster, HARP 2.0 will control year. This may limit the number of homeowners the rate at which new distressed assets hit the eligible for refinance. market, thereby offering significantly better uplift to the housing market with lesser effort as As the short-term payroll tax cuts are proposed to compared with HAMP and HARP 1.0. be funded through an increase in the guarantee fees (G-Fees) charged by the government-spon- In recent developments, in December 2011 sored enterprises (GSEs) from lenders, lenders Fannie Mae updated its seller guide to reflect may pass on the charge to borrowers, thus the changes announced as part of HARP 2.0. rendering the impact of payroll tax cuts on the Fannie surprisingly eliminated the requirement housing market ineffective. that the lender determine if the borrower has a reasonable ability to repay the mortgage. Thus, Insurers such as the AIG-owned United Guaranty for Refi Plus1 the lender will no longer be required have opposed reps and warranties waivers as to determine the borrower’s reasonable ability to they feel that the risk of any fraudulently written repay the mortgage. This indicates that the GSEs or bad loans will have to be borne by all insurers are much more willing to provide lenders with along with the GSEs and taxpayers. Without the reps and warrants relief than previously antici- support of all the entities involved, the program pated. This change may entice lenders further cannot succeed. to participate in HARP 2.0. This also shows that the complete picture of HARP 2.0 is still emerging Conclusion and the effectiveness of the program depends on Though HARP 2.0 does not target distressed the final shape that this program takes. borrowers and shadow inventory, based on our

cognizant 20-20 insights 7 Appendix securities led to the fall of many financial institu- tions that had invested in them. This ultimately The U.S. Housing Market led to the financial crisis in the United States and As covered in the background section, the U.S. impacted other economies the world over. housing market witnessed a boom period in the early part of the millennium powered by low Figure A1 shows the rates for 15-year and 30-year interest rates, favorable housing tax policies and fixed rate mortgages (FRMs), and adjustable financial deregulation. However, these circum- rate mortgages (ARMs). This chart shows the stances promoted risk-taking among lenders who relative low levels to which ARM rates dropped began financing sub-prime and no-doc mortgages as compared to FRMs between 2003 and 2005, and flipped homes to realize abnormal profits. An leading to more buyers and investors flocking to increase in mortgage rates by 2006 triggered ARMs. With a subsequent increase in Fed interest defaults on sub-prime mortgages and increased rates, ARMs went up steeply and matched FRMs foreclosures. Housing prices began to fall and the in 2005. corresponding decline in the value of mortgage

Historical Mortgage Rates (%)

10

8

6

4

2

0 Oct ‘95 Mar ‘97 Jul ‘98 Dec ‘99 Apr ‘01 Sep ‘02 Jan ‘04 Oct ‘06 Feb ‘08 Jul ‘09 Nov 10 Apr ‘12

Mortgage Rates — 30 year FRM Mortgage Rates — ARM Mortgage Rates — 15 year FRM

Source: FHFA — Historical Mortgage Rate Summary Tables Figure A1

New Home Sales New for Sale Homes (in thousands of units) (in thousands of units)

553 531 1279 1201 468 1091 426 1049 395 976 907 348 880 328 769 304 301 279

211 482 169 374 321 304

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year Year

Source: Census and National Association Source: Census and National Association of Home Builders (NAHB) of Home Builders (NAHB) Figure A2 Figure A3

cognizant 20-20 insights 8 Existing home sales Existing home inventory (in thousands of units) (thousands of units)

6478

3450 3520 5040 3130 4340 4420 3020 4110 4190 2740 2580

2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Year Year

Source: NAHB and National Association of Realtors Source: National Association of Home Builders (NAHB) Figure A4 Figure A5

Figure A2 shows the new home sales figures from The overall indicator of the U.S. housing 2000 to 2011 (latest as of November 2011). New market performance, the house price index home sales rose from 0.9 million units in 2000 (HPI), is shown in Figure A6. U.S. home prices to a peak of 1.3 million units in 2005. Home sales had increased steadily in the early part of the declined steeply thereafter to just 0.3 million last decade, rising to a peak of 154.65% of the units in 2011. Figure A3 shows that new for sale January 2001 prices in April 2007. However, homes followed a similar trend, albeit with a lag prices declined rapidly thereafter, bringing many of a year which is attributable to the reaction homeowners underwater (owing more on homes time needed for new home construction to match than their worth). the trend in new home sales. The decline in housing prices lowered the equity of The data on existing home sales shows that sales mortgage borrowers, and with high interest rates in this segment, after peaking at about 7 million and a weakening job market, many borrowers units in 2005, have declined since then, with the began to default on their mortgage payments activity picking up slightly in the last two years and foreclosures accelerated. This led to a vicious (see Figure A4). The huge inventory of existing cycle in which falling property prices led to more homes for sale, as shown in Figure A5, further foreclosures, which in turn led to more borrowers highlights the depressed state of the U.S. housing defaulting on their loans. market since 2006.

House Price Index

240 220 200 180 160 140 120 100 7/24/1998 10/1/2000 12/10/2002 2/17/2005 4/28/2007 7/6/2009 9/14/2011 11/22/2013

Source: FHFA - House Price Index History Figure A6

cognizant 20-20 insights 9 Footnote 1 Refi Plus (also known as Fannie Mae Refinance Plus and FNMA Refi Plus) is the HARP or Home Affordable Refinance Program offered through Fannie Mae.

References U.S. housing market scenario http://en.wikipedia.org/wiki/Causes_of_the_United_States_housing_bubble http://en.wikipedia.org/wiki/United_States_housing_market_correction

New and existing home sales data http://www.nahb.org/fileUpload_details.aspx?contentID=55761 http://www.census.gov/econ/currentdata/ http://www.mortgagesbymark.com/blog/economy/nar-releases-revised-existing-home-sales- numbers/#more-1866

Historical mortgage rates http://www.fhfa.gov/Default.aspx?Page=252

House price index http://www.fhfa.gov/Default.aspx?Page=87

Economic outlook http://www.bloomberg.com/news/2012-01-04/revealing-interest-rate-forecasts-advances-bernanke-s- transparency-drive.html http://www.newsday.co.zw/article/2012-01-04-us-consumer-eyed-to-lift-global-economy http://www.huffingtonpost.com/ebong-eka/the-payroll-tax-cut-exten_1_b_1183778.html

Government support programs http://en.wikipedia.org/wiki/Housing_and_Economic_Recovery_Act_of_2008 http://money.cnn.com/2011/07/08/real_estate/obama_housing_scorecard/index.htm http://www.makinghomeaffordable.gov/programs/view-all-programs/Pages/default.aspx http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Pages/default.aspx http://www.mortgageloan.com/more-hamp-mods-made-permanent-8905 http://www.fhfa.gov/Default.aspx?Page=172 (Federal Housing Finance Agency - Foreclosure Prevention & Refinance Reports – Oct. 09, Second quarter 2010 and Oct. 2011) http://www.mortgagenewsdaily.com/channels/pipelinepress/12222011-harp-2-0-quicken-loans.aspx http://www.corelogic.com/about-us/news/media-advisory-corelogic-identifies-harp2.0s-winners-and- losers.aspx?WT.mc_id=harp2_prnw_pr_hrp_1_111115 http://www.housingwire.com/2011/11/15/aig-owned-united-guaranty-opposes-harp-2-0-blanket-reps- and-warrants-waivers http://library.hsh.com/articles/refinancing/harp-2.0-your-5-steps-to-approval.html?WT.qs_osrc=fxb- 35697510 http://library.hsh.com/articles/refinancing/breaking-down-the-new-harp-program.html http://library.hsh.com/articles/refinancing/harp-whats-it-about-why-it-failed-and-why-its-changing.html http://themortgagereports.com/259/harp-making-home-affordable-guidelines http://www.totalmortgage.com/blog/mortgage-rates/freddie-mac-sees-harp-2-0-helping-1-5-million- borrowers/14756 http://www.marketwatch.com/story/harp-20-rules-and-who-will-benefit-2011-11-18 http://smartmortgageadvice.com/?p=942 http://www.zillow.com/wikipages/HARP-FAQs/

cognizant 20-20 insights 10 http://www.zillow.com/mortgage-calculator/harp-eligibility/ http://www.fha.com/hope_for_homeowners.cfm http://homebuying.about.com/od/financingadvice/a/101408_FHA-Refi.htm http://en.wikipedia.org/wiki/Home_Affordable_Modification_Program

About the Authors Amit Churiwal is a Consultant with Cognizant Business Consulting, where he has worked with the Card and Payments Practice and is now a part of the Consumer Lending Practice. He can be reached at [email protected].

Ashish Shreni is the Consumer Lending Practice Head with Cognizant Business Consulting and has worked for over 12 years in the banking, brokerage and insurance space on projects spanning business and IT strategy, business process optimization and complex project execution. He can be reached at [email protected].

About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out- sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 137,700 employees as of December 31, 2011, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7121 0102 Fax: +91 (0) 44 4209 6060 Email: [email protected] Email: [email protected] Email: [email protected]

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